Sign-up for FSA’s new optional Counter-Cyclical program, the Average Crop Revenue Election (ACRE), program ends Aug. 14. Producers who have already signed up for DCP program are still eligible to sign-up for the ACRE program.

Economic uncertainty — especially price uncertainty, the knowns and unknowns of ACRE are limiting producer sign-up for the ACRE program.

The knowns of ACRE are problematic:

First, a producer loses 20 percent of a FSA farm’s direct payments. Direct payments are not tied to production and ACRE payments are.

Second, the producer’s loan rates are reduced by 30 percent. The 30 percent loss in loan rate and marketing loan benefits (ex: marketing loan gains and loan deficiency payments) are especially important to rice and cotton producers who must market into a highly competitive, protected, and potentially deflationary global market.

Third, enrollment in ACRE means the producer is trading or losing his benefits in the counter-cyclical program. Also, counter-cyclical payments are not tied to production and ACRE payments are.

Fourth, once a FSA farm is enrolled into ACRE, it remains in ACRE for the remainder of the farm bill or through 2012.

Fifth, direct and counter-cyclical payments are not considered trade-distorting while it’s highly likely ACRE payments, since they are tied to production, will not be viewed favorably by our global trading community.

Economic uncertainty

What about economic uncertainty? The U.S. and global economy are struggling through a very dangerous recession with future economic activity still uncertain. The last recession was in 2001 and U.S. farm rice prices averaged $4.25 per hundredweight, cotton prices averaged 29.8 cents per pound, wheat averaged $2.78 per bushel, soybeans averaged $4.38 per bushel, and corn prices averaged $1.97 per bushel.

Inflation will become problematic at some point in the future, but until the deflationary forces are defeated we remain concerned about further declines in commodity prices.

Especially for cotton and rice producers in these deflationary economic times, the knowns of traditional farm policy make a lot of sense.

The knowns are:

First, a full direct payment.

Second, a full counter-cyclical payment is triggered when prices fall below a certain level.

Third, direct and counter-cyclical payments will be received whether you plant or not.

Fourth, direct and counter-cyclical payments are seen as less market disruptive in global trade talks than the ACRE payment.

ACRE example: rice, soybean and wheat farm

What are the expected traditional and ACRE farm government program payments on a 3,240-acre rice, soybean, and wheat farm? The farm has the following base acres: 1,620 long-grain rice acres; 1,296 soybean acres; and 324 wheat acres. 2009 planted acres are assumed to be the same as the farm’s base acres.

The average 2009 yield is projected at the following: long-grain rice 71.5 hundredweight per acre or 159 bushels per acre; soybeans 43.9 bushels per acre; and wheat 63.1 bushels per acre.

The Texas A&M ACRE decision aid program using FAPRI’s 2009-2012 marketing year prices provided the following results:

Rice FAPRI prices used were: 2009, $10.98 per hundredweight; 2010, $10.26 per hundredweight; 2011, $10.62 per hundredweight; and 2012, $11.23 per hundredweight.

Soybean FAPRI prices used were: 2009, $8.75 per bushel; 2010, $8.78 per bushel; 2011, $9.08 per bushel; 2012, $9.30 per bushel.

Wheat FAPRI prices used were: 2009, $5.27 per bushel; 2010, $5.26 per bushel; 2011, $5.41 per bushel; 2012, $5.51 per bushel.

The traditional direct and counter-cyclical program showed a total payment in 2009 of $227,599 for the farm; in 2010, $230,076; in 2011, $227,939; in 2012, $226,302 — for the farm with a four-year total of $911,912. The price driven probability decision aid program projected the minimum possible payments at $779,719 and the maximum possible payments at $1,625,486 for the farm.

The new ACRE Program showed a total payment in 2009 of $341,804 for the farm; in 2010, $329,015; in 2011, $257,070; in 2012 a total payment for the farm of $225,223 — with a four-year total of $1,153,112. The price driven probability decision aid program projected the minimum possible payments at $626,548 and the maximum possible payments at $1,738,492 for the farm.

A slide show of this and three other ACRE Arkansas farm examples is available at the following link: http://www.aragriculture.org/agfoodpolicy/Hignight_ACRE.pdf.

FSA has developed an outstanding ACRE Decision Aid program. Using the previous rice, soybean, and wheat farm data in FSA’s ACRE Decision Aid Program produced the following results: Under the traditional direct and counter-cyclical program, payments for 2009 were estimated at $193,898 for the farm. Under the new ACRE program, farm payments were estimated at $300,583.

The 2009 marketing period price estimate used in this analysis was FAPRI’s rice estimate of $10.98 per hundredweight; soybeans, $8.76 per bushel; and wheat, $5.30 per bushel.

A slide show with additional information on this analysis is available at the following link: http://www.aragriculture.org/agfoodpolicy/Watkins_ACRE.pdf.

What ACRE is:

• It is an alternative to the direct and counter-cyclical (DCP) payments for crop years 2009 through 2012.

• It is a program designed to protect against short-term revenue loss from either a decrease in market price, yields or a combination of the two. DCP provides protection against a decline in market prices below the effective target prices and loan rates.

• Producers participating in ACRE elect to forgo counter-cyclical payments, receive a 20-percent reduction in direct payments, and a 30-percent reduction in marketing assistance loan rates for all commodities produced on the participating FSA farm.

• ACRE payments are tied to current planting on the farm. Counter-cyclical payments are not tied to current farm planting, but are tied to established base acres and yields.

• Producers may elect to enroll one FSA farm in the program and not enroll one or more FSA farms, so producers may elect the ACRE alternative on a farm-by-farm basis.

• A producer must enroll all of the farm’s base acres on the farm and there is no authority to establish base acres to participate in the ACRE program.

• All producers (owner, tenant, etc.) on a FSA farm number must agree in writing to the ACRE program election. They must also sign a contract to enroll in ACRE program by the sign-up deadline of Aug. 14.

• A decision to elect to participate on a FSA farm may be made in 2009, 2010, 2011, or 2012. Once the farm is in ACRE the farm is bound to ACRE through 2012 crop year, the last crop year covered by the 2008 farm bill.

• It provides eligible producers a state-level revenue guarantee as defined by this program. The guarantee is based on the five-year state Olympic average yield and the two-year national average price (2007 and 2008).

• ACRE payments are made when two conditions are met for a commodity. The first condition is met when the actual state revenue falls below the state ACRE guarantee. The second condition is met when the actual farm revenue falls below the farm ACRE guarantee.

• If both state and farm “triggers” are met, the ACRE payment calculation will provide benefits for both planted and prevented planted acres of covered commodity crops or peanuts. Prevented planted acres are “considered planted.”

• ACRE payment to the farm will be calculated by using the state ACRE payment times the (farm average yield divided by the state benchmark yield) times 83.3 percent (85 percent in 2012).

• ACRE payments can be calculated for eligible commodity crops that do not have base acres on the farm. ACRE payments are based on planted and considered planted acres of eligible commodity crops, without regard to whether or not the farm has base acres for that crop. However, the maximum acreage eligible for ACRE payments cannot exceed the total base acres on the farm.

• There are no risk management purchase requirements for the DCP or the ACRE programs. However, higher levels of insurance due to higher premiums will enhance the ability to meet the “farm trigger” for ACRE.

• Producers must sign up by Aug. 14 at their local FSA offices.

Bottom line:

Except for cotton, the potential for some fairly attractive 2009 ACRE payments appear possible due to the spike up in 2008 commodity prices and the significant decline since, so the question becomes how important is the traditional farm program to our producers in these uncertain economic times?

The reality is that in these uncertain economic times, deflation remains a concern until economic momentum is regained or until inflation becomes problematic. Since no one knows if the economic recovery will be fairly quick or lengthy, shifting away from traditional farm policy requires a great deal of study.

There’s no question that inflation will have its day, which could be possibly sooner rather than later. For the immediate period, grain prices still appear to have price weakness, so the near-term grain price bottom still has to be determined. Then we can focus on the potential rebounds.

From a historical perspective, 1980-2007, under the new ACRE program how often would ACRE payments been received?

• Arkansas irrigated soybeans would have received payments in seven of the 28 years — 1981, 1982, 1985, 1986, 1998, 1999, and 2000.

• Arkansas rice would have received payments in nine of the 28 years — 1981, 1982, 1983, 1986, 1992, 1999, 2000, 2001, and 2002.

• Arkansas cotton would have received payments in five of the 28 years — 1993, 1998, 1999, 2000, and 2001.

• Arkansas wheat would have received payments in eight of the 28 years — 1985, 1986, 1987, 1990, 1991, 1998, 1999, and 2005.

• Arkansas corn would have received payments in four of the 28 years —1980, 1998, 1999, and 2005.

A slide show with additional information on this analysis is available at the following link: http://www.aragriculture.org/agfoodpolicy/Coats_ACRE.pdf.

Participation in ACRE will lower the loan rate by 30 percent, which lowers all marketing loan benefits by that amount.

For cotton producers, knowns of the traditional farm government program clearly outweigh the unknowns of the ACRE program. The credit crisis collapsed cotton prices to a level that not only triggered counter-cyclical payments, but the policy mechanisms of marketing loan benefits have re-emerged as critically important.

It is obvious that cotton’s current economic circumstance has not been lost on rice producers since Arkansas presently has no one signed up for the ACRE program. Rice is one of the world’s most protected food grains and a commodity that has the potential to show price weakness in today’s deflationary and protectionist economic setting.

Don’t lose sight of possible continued WTO trade distorting challenges from U.S. grain trading competitors like Brazil. Direct and counter-cyclical payments are seen as less market disruptive in global trade talks than revenue ACRE payments. Thus, the ACRE revenue package is more likely to be challenged as globally trade distorting than the traditional direct and counter-cyclical program.

Economic uncertainty, knowns and unknowns of ACRE are limiting producer sign-up for the ACRE program across the U.S.

We would like to thank our Farm Service Agency partners for all their assistance, especially Sharon Baker and Clay Medford. They have amazing knowledge of the mechanics of this program and their assistance in our work was invaluable.

* Robert Coats, Professor/Economics; Brad Watkins, Associate Professor/Economics; and Jeffrey Hignight, Research Associate/Economics: University of Arkansas, Division of Agriculture, Agricultural Economics and Agribusiness.